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Overview
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About the Author: Dr. J. Michael Cobb, worked extensively in Saudi Arabia in the early 1980's and later in the mid 1990's. His major work involved on the planning, development finance and implementation of Jubail Industrial City, while serving as a senior manager and later consultant with the Saudi Arabian Bechtel Company and the Royal Commission for Jubail and Yanbu. His other work in the Kingdom involved the planning and development implementation of the country's two major new international airports and other private real estate projects. While with Bechtel and the Royal Commission, he also served on a national committee advising SABIC's industrial investment program for the Kindom.
- Saudi Arabian Economic Background
The Saudi economy is currently dominated by massive state corporations which
account for about two thirds of the Kingdom’s GDP. These
include firms such as Saudi ARAMCO, the Saudi Basic
Industries Corporation (SABIC), the Saudi Electricity
Company (SEC), the Saudi Telephone Company (STC) and the Saline Water Conversion Corporation
(SWCC). One should remember, however, that
prior to the Kingdom’s great oil boom in the 1970s, most of these companies, including
ARAMCO, were privately owned.
Due to the increasing levels of public debt in the Kingdom, combined with declining public capital expenditures and generally lower levels of real growth in the economy, the government is refocusing its policies toward increasing the private sector role in country’s economic development. Key leaders such as HH Prince Abdulla bin Faisal bin Turki Al-Saud, Governor of the Saudi Arabian General Investment Authority, have recently stressed the important role that privatization could assume in spurring local private investment as well as greater foreign direct investment.
Other advantages of increased privatization include retirement of major portions of current public debt, reductions in future public debt and state subsidies, innovations in new management and marketing techniques and the potential repatriation of significant levels of Saudi private capital currently invested abroad.
Until recent policy changes, which are discussed below, the Saudi government’s efforts in privatization were mainly involved in permitting private management of port and airport operations and the provision of education, health and some postal services is support of the primary government entities. However, outright sale of existing state assets has not yet occurred.
There is movement toward greater privatization, however, in the electric power sector, as is discussed below. Actions toward state asset privatization for other sectors is much slower. SABIC has been 30 percent private for many years, and was constituted to be eventually completely private although most observers say this unlikely anytime soon. As for Saudi ARAMCO, the Kingdom’s primary asset, there has been no public mention of even partial privatization of any of its horizontal or vertical entities.
Other areas often cited as privatization candidates include various municipal services (as discussed below for Jubail and Yanbu), the national airline, hotels, various distribution facilities and more private shareholders in state banks. For substantial private sector involvement to occur, however, fundamental changes in the Kingdom’s institutional structures were required. The following section outlines these significant recent changes.
Recent Key Institutional Changes
Saudi Arabia announced a significant new Kingdom-wide investment promotion and development system in April 2000. Culminating several years of work by the government and the private sector, the new system seeks to transform and improve the Kingdom’s development strategies and priorities, especially focusing on initiatives for accelerating private sector investment and development in the country. This new private sector focus is a key investment component of the official 2000-2005 Kingdom development plan and is also a key component of the country’s WTO membership strategy of attracting up to $200 billion in foreign investment during the next 20 years. Below is a brief overview of these new private sector focused Institutional changes
Supreme Economic Council
In August 1999 King Fahd established the new Supreme Economic Council headed by Crown Prince
Abdullah. This new body, which includes representatives from the private sector as
well as government, , is charged with developing the new economic strategies for the Kingdom
as well as will insuring the legislative
changes needed for their implementation.
Supreme Petroleum Council
Recognizing the importance of energy to the Saudi Economy, in January 2000 King Fahd then established the Supreme Petroleum Council. Their mandate is to oversee the development of new strategies regarding the Kingdom’s role in world oil markets and OPEC as well as developing new strategies for opening-up of private sector investment opportunities in the energy sector, particularly for natural gas which is not only a fuel source but also the key feed stock for the Kingdom’s petrochemical industry.
The Kingdom’s new Foreign Investment Law is one of the key initiatives taken by the new Supreme Economic Council. Adopted by the Council of Ministers in April 2000, the new Foreign Investment Law now permits 100 percent foreign-owned ventures having the same privileges, incentives, and guarantees as Saudi-owned ventures.
Business applications and permitting are also being streamlined in that the basic government assumption is they will be promptly approved. The Law requires all new investment applications be handled within 30 days from the time required documents are submitted. If there is no action to disapprove during this period, the investment initiative will be registered as approved.
Foreign Investment & Property Ownership
The by-laws approved and released in late 2002 by the Saudi Arabian General Investment Authority (SAGIA) offered new incentives for foreign investment. Foreign investors can now own property in the Kingdom. This includes sponsoring their own employees and having 100 per cent ownership of projects established in Saudi Arabia.
Also, according
to Arab News reports, foreign investors now will not need
Saudi sponsors, can repatriate all profits and will generally have
access to all facilities available to Saudi businesses. Among other key
new incentives, the corporate tax rate
has been reduced from 45 to 30 per cent, including tax holidays.
In newly
announced SAGIA executive by-laws, there are 23 articles addressing
investment, licensing, legal regulations and other factors important in
attracting foreign investment in the Kingdom.
(Click here to see our further review of the recetly revised Executive Rules government foreign investment in the Kingdom).
Opening of the Saudi Stock Market
A related major change by the Supreme Economic Council in late 1999 was the opening up of the Saudi stock market (Tadawul) to foreign investors. Previously, only Saudi citizens were allowed to own individual securities, and Saudi mutual funds allowed only foreign investment from neighboring Gulf Cooperation Council (GCC) states. However, the new regulations allow international investors share access to twelve (12) mutual funds operated by various Saudi banks, with many thinking that the individual stocks ownership by soon follow.
Saudi
Arabian General Investment Authority
In a related separate April 2000 decree, the new Saudi Arabian General Investment Authority (SAGIA) was established. Under the direction of Governor HH Prince Abdulla bin Faisal bin Turki Al-Saud, SAGIA forms a one-stop investor support agency, specifically the Comprehensive Service Center (CSC), charged with insuring an efficient approvals process while also promoting new investments.
The previous investment promotion agency, Saudi Consulting House, was dissolved with its functions restructured into the CSC. SAGIA incorporates and coordinates all of the various investment focused branches of the government and also includes representatives from the private sector sitting as full members on the Board.
The
Saudi Electric Company
In February 2000 a merger
agreement was signed among Saudi Arabia's 10 existing power companies. This included the
four critical "SCECO"'s (West, East, South and Central) which together controlled
about 85% of the Kingdom’s power supplies. Later in April 2000 this merger resulted in the
much anticipated Saudi Electric Company (SEC), a joint-stock
company 50% owned by the Saudi government.
The establishment of SEC
appears to offer the potential for eventually splitting off separate companies for power
generation, transmission and distribution and for private sector construction of plants
under various BOT models. However, no one minimizes the challenges remaining to be resolved
over issues of taxation, the underlying legal and regulatory frameworks, fuel supply and
power purchase agreements and other operating concerns.
For many years the four SCECO companies operated at a loss due to inefficiencies, non- payments by customers and requirements to sell power at below cost to Saudi consumers. The new SEC was to correct these difficulties. With a promising beginning, in April 2000 the new company increased power tariffs to major power customers. However, this was short lived. Due to the resulting widespread criticism, by early October 2000 these rate increases were rescinded, an action viewed by many as a move away from reform of the power sector and possibly a move away from privatization in the Kingdom generally.
- 2003-2023
Saudi Arabia recently announced plans for infrastructure investments of $700 billion over the next twenty years, with substantial opportunities to be provided for foreign involvement.
Speaking at the Middle East Infrastructure Development Congress in Dubai in late Septermber 2003, Prince Abdullah bin Faisal bin Turki Al Saud, Chairman and CEO of the Saudi Arabian General Investment Authority (Sagia) indicated the major sector investment would include: the electricity sector at SR435 billion; the water resources sector at SR330 billion; telecommunications at SR225 billion; petrochemicals investments at SR345 billion; a various other basic infrastructure projects totaling SR525 billion.
Citing the Kingdom's recent April 2000 Saudi Investment Act, discussed above, Prince Abdullah stressed that the investment environment for foreign investors had been substantially bolstered, privatization is well underway and that twenty 20 economic areas currently under state control have been slated for further privatization. The Prince emphasized that economic and legislative reforms are an on-going process but that privatisation is a corner stone of the Kingdom's economic reforms. (See the TradeArabia News service for the latest on Saudi Arabia's investment and development announcements).
- An Important Shift In
Emphasis
We consider such an assessment from the SEC actions, however, premature, especially in light of more recent developments employing new financing mechanisms and public-private initiatives in the Kingdom. For example, Ghazlan II is a $1.7 billion Eastern Province power project being financed with a $500 million commercial syndicated loan, a first in Saudi Arabia. Also, in October 2000 plans were approved for a SF 2.5 billion Saudi Joint Stock company, the Power and Water Utility Company for Jubail & Yanbu, or MARAFIQ.
Shareholders include the Royal Commission, Saudi Aramco, the Public Investment Fund, SABIC and local private investors. MARAFIZQ will take over management, operations, maintenance, and expansion of power, water, wastewater, seawater cooling and related utility infrastructure needs for current and future growth of the two industrial cities. The new utility also will take over leases on the existing facilities and will own them outright at lease expiration.
Post
9-11: A Personal Perspective
Over the last thirty years, most of the opportunities
that Saudi Arabia had to offer the business world involved government contracts.
Although these will continue, the government indicates that most of the newer opportunities
will involve private sector investment and new private business ventures.
The great state funded mega projects and investments of the past 30 years were
essential in providing the underlying infrastructure base for the Kingdom.
These national investments were successfully accomplished and the platform is now there for supporting the further development of a modern economy where the private sector takes a major role. With globalization of the world’s economy and great technological and communication capabilities becoming increasing available to people everywhere, however, Saudi Arabia continues to face great external as well as internal challenges.
The impacts of the World Trade Center 9-11 tragedy of 2001, followed the global War on Terror and the its direct impacts playing our in Afghanistan and Iraq, are still reverberating not only in the Middle East but throughout the world. And most certainly these impacts are being felt not only within the government but with the business community and with ordinary Saudis throughout the Kingdom.
Saudi Arabia is also now are confronting terrorism directly within its own borders. In addition to the pressures of the the Post 9-11 aftermaths, the people of Saudi Arabia must also continue addressing the impacts of globalization on - and within - their country. Ways must be found for appropriately integrating the great global economic, technological and communication forces into their country for the good of their people. This appropriate integration of globalism most certainly must involve upholding and strengthening the critical social, cultural, religious and institutions values forming the foundations of the Saudi Arabian society.
For their neighbors in the Middle East as well as the rest of the world, the Saudis also appear to have a continuing critical role to play on the world stage. That is, once again serving a major stabilizing force in the volatile political area of the larger Middle East region. Our view is that the Saudi people can and will continue to successfully meet these great challenges, not only for their own people but for all of us.
- The
Dimensions of Growth in Saudi Arabia:
- Small and Medium Industry, Dec. 2000
Saudi Arabia: Major Investment Opportunities in the 21st Century. WDF Conference Presentations. Jubail, Nov. 2000
- Saudi Arabia 2000 Economic Trends
- U.S. Embassy, Riyadh. Apr. 2000
- Saudi Arabian General Investment Authority, Apr. 2000
- Web site outlining Kingdom's new investment laws
- Discussion
with HH Prince Abdulla bin Faisal bin Turki Al-Saud
- Governor of the Saudi Arabian General Investment Authority. The Saudi Review, Nov. 2000